The potential for oil and natural gas infrastructure development remains “significant” through 2025 as the U.S. economy recovers from Covid-19 and exports increase, according to ICF Resources Inc.

Domestic Natural Gas

In a report prepared for the Interstate Natural Gas Association of America (INGAA), ICF said one scenario used by researchers to evaluate changes to markets and infrastructure development found that almost 33 Bcf/d of capacity is expected to be placed into service during between 2020 and 2025. The projected development is lower on a per-year basis than it was in 2018, which was “a banner year for pipeline construction,” according to ICF.

“While projected development is down by almost 6 Bcf/d, or about 15%, from the level projected” in a second ICF scenario, “it still requires a substantial amount of new infrastructure,” researchers said.

ICF relied on its market modeling tools to complete two scenarios of North American oil and gas markets through 2025. The first scenario, ICF Q1 2020, showed market and infrastructure development trends prior to the Covid-19 pandemic and absent extended delays in infrastructure development. The second, INGAA 2020, is more recent, attempting to fully capture impacts of the pandemic and extended delays in infrastructure development.

“The pandemic has no doubt slowed the pace of infrastructure development as demand for natural gas and oil were impacted globally, but this report shows that will change as markets rebound,” said INGAA Foundation Executive Director Tony Straquadine. “The industry is well positioned to respond to the needs and challenges outlined in this report as domestic demand and export capacity return to the trajectory we saw entering 2020.”

In the report, titled “North American Midstream Infrastructure – A Near Term Update Through 2025,” the ICF research team said it expects markets to rebound as demand returns. Domestic natural gas use is expected to rise to an average of roughly 87.5 Bcf/d in 2025, which is about 3.6% above the 2019 level.

LNG Growth Market

Liquefied natural gas (LNG) exports are expected to be a major driver of future demand growth for U.S. export markets, according to the report. ICF researchers noted that last July, monthly average feed gas deliveries to gas export facilities dipped below 3.5 Bcf/d for the first time since 2018. However, feed gas deliveries set a record in November, surpassing 10 Bcf/d. 

December 2020 feed gas deliveries were higher still, finishing the month at around 11 Bcf/d. The INGAA 2020 scenario projects that LNG exports could rise to 11.7 Bcf/d by 2025 from 5.7 Bcf/d in 2019, an increase of more than 100%.

“International consumers have growing needs for oil and gas, particularly in Asia where large volumes of natural gas are needed to replace coal generation and support renewables deployment,” researchers said.

Asian demand is what has driven the remarkable improvement in U.S. gas demand this winter. Although the recent rally appears to have lost momentum, spot prices shot above $30/MMBtu earlier in January to an all-time high. 

Looking ahead, ICF expects the global LNG trade to grow by 80% by 2040. The team pointed out that international customers “value supply diversification” and favor oil and gas supplies from the United States because of its “economic stability and clearly defined and relatively stable laws and regulations.” Given the projected growth in exports, ICF said new gas infrastructure is needed, particularly in Texas and Louisiana.

Robust Mexico Exports

Pipeline exports to Mexico also are robust. ICF expects exports south of the border to rise to 7.4 Bcf/d in 2020 from 5.1 Bcf/d in 2019, an increase of about 45%. Researchers said Mexico is continuing to retire and replace its older oil-fired generation with more efficient and less expensive gas.

“U.S. natural gas supplies are less expensive than alternatives, including LNG imports, and challenges within Mexico to increase domestic production are expected to persist,” said the ICF team. “Thus, natural gas from the U.S. will continue to be an important source of supply for Mexico’s natural gas needs, reducing energy costs as well as carbon emissions.”

Meanwhile, the projected rebound in U.S. natural gas use is expected to be “most significant” in industrial and commercial activities, which ICF said were most hurt by the Covid-motivated business closures that occurred during 2Q2020. Power sector gas use also is set to continue growing, albeit at a slightly slower pace because of the pandemic.

“Natural gas is still a highly desired and cost-effective source of energy for space heating, water heating, cooking and industrial applications,” researchers said.

In the INGAA 2020 scenario, total gas consumption is forecast to exceed the 2019 level by 2024. In aggregate, total gas demand would rise to 87.5 Bcf/d by 2025, roughly 3 Bcf/d, or 3.6%, above the forecast 2019 level.

Looming Supply Rebound

On the supply side, ICF noted that after many exploration and production (E&P) firms slashed their budgets in 2020, the INGAA 2020 scenario shows that activity should rebound as markets continue to recover and commodity prices firm.

“A significant amount of economically viable oil and gas resources remain to be developed in the U.S. and Canada; continued productivity improvements in drilling and completion techniques along with unit cost reductions will make it possible for oil and gas production to grow even with lower drilling levels,” ICF said.

“Even though the path has been altered by recent events, the INGAA 2020 scenario shows oil and gas production levels continuing to increase in the future. As the impacts of Covid-19 diminish over time, the drivers of new infrastructure return.”

The INGAA 2020 scenario shows that oil production would grow to 14.2 million b/d by 2025, roughly 2.5 million b/d (21%) above the 2019 level. Gas production would grow to 103.0 Bcf/d, roughly 10.4 Bcf/d, or 11.1%, above 2019 levels.

“While these levels are lower than those projected in the ICF Q1 2020 scenario, the rebound and growth in production is still substantial,” ICF said. “These trends occur because a significant amount of economically viable resource remains to be produced throughout the U.S.”

Production growth is to be widespread, but the Permian Basin should retain its status as the most rapidly growing production area in North America, even after the pandemic, according to ICF. “It is still the most cost-effective basin in North America.”

Slowing In Appalachia

On the other hand, after having experienced an exponential growth in the past decade, the Marcellus/Utica shale growth rate is projected to slow dramatically during the next few years. “While the incremental growth of 4.1 Bcf/d by 2025 shown in the INGAA 2020 scenario seems large, it is merely a 13% increase over the basin’s 2019 level, while the Permian growth is up 46%,” ICF said.

Dramatic production increases also could occur in the Texas/Louisiana Haynesville Shale, as well as Oklahoma’s two unconventional plays known broadly as the SCOOP and STACK, otherwise known as the South Central Oklahoma Oil Province and Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties. ICF sees 2025 production in the formations up by more than 5 Bcf/d, or 35%, from the 2019 level, with the Haynesville leading the way.

[Want to know how global LNG demand impacts North American fundamentals? To find out,  subscribe to LNG Insight.]

While there is still “a significant amount of economically viable resource” remaining in the Marcellus/Utica, opposition to several key pipeline projects have delayed or led to their cancellation, according to ICF. Now, pipeline developers are shifting toward areas in Louisiana, Oklahoma and Texas, where infrastructure development has been “less contentious.”

The ICF team said capital still appears to be available for infrastructure when a project’s need is “clearly demonstrated.” Furthermore, capacity projected in the INGAA 2020 scenario has sufficient market support to justify final investment decisions.

“While permitting new infrastructure is challenging in today’s environment, new capacity is economically justified, even considering the strong headwinds created by Covid-19 and other recent market events.”

That said, pipeline safety remains “an important focus” in light of the new Pipeline and Hazardous Materials Safety Administration (PHMSA) rules finalized earlier this month. These rules are expected to drive continued investment in safety programs for pipelines over the next 15 years, according to ICF. 

“New PHMSA rules have intensified pipeline safety efforts, and all pipeline companies deem pipeline safety measures as critical to maintaining social license to operate and provide services to customers.”